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Small business financing: Less help for now

WITH banks having tightened lending to small businesses since the 2008 recession, government could step in to boost their access to finance.

But the Small Enterprise Finance Agency (Sefa), a state agency that lends to small businesses, plans to cut back on providing loans this financial year because of a dramatic increase in impairments.

Sefa is a subsidiary of the Industrial Development Corp (IDC). It intends to reduce disbursements from an estimated R1.07bn for 2015/2016 to R885m in 2016/2017, and to focus on collections.

The move is outlined in Sefa’s corporate plan for the next five years, presented to parliament last month.

Since its inception in 2012 Sefa has approved more than 115,000 loans, totalling over R2bn, to micro-and small enterprises. But impairments have now soared to 38% of its loans book, from 25% in 2014.

Sefa chief executive Thakhani Makhuvha attributes the rise in defaults to the agency’s big increase in direct lending to small firms, which has grown to a projected R496m in disbursements for 2015/2016, from R41m in 2012/2013.

Impairments are now at 58% of the direct lending portfolio, far higher than the defaults on wholesale lending, at 15%, and those of lending via micro-finance intermediaries, at 18%.

The agency’s predecessors, Khula and SA Micro Apex Finance (Samaf), conducted only wholesale lending, loaning funds to intermediaries, which then lent to small and micro-businesses.

With the formation of Sefa from a merger of Khula, Samaf and the IDC’s small business lending portfolio, the state began offering direct lending alongside wholesale lending. Borrowers don’t have to put down any collateral to access direct loans.

Makhuvha attributes the increase of impairments to the difficult market conditions, but he says a number of business owners who took out bridging finance to bankroll tenders failed to honour payments. Some defaulted after not performing on contracts.

He says the agency often opens joint bank accounts with clients as a form of security, but that this has not stopped some from later changing to another account.

One way to resolve this would be for borrowers to cede contracts to the agency. But under current treasury rules this is prohibited. Makhuvha says the agency is in talks with national treasury to permit cessions.

It will be crucial to resolve this if the 30% set-aside announced by President Jacob Zuma last year comes into effect, as Sefa will be expected to step up the number of bridging finance loans it writes, he says.

For now, Makhuvha says the agency will scale back on direct lending. It expects to disburse about R212m in such loans in the current financial year.

In 2020/2021 it expects to disburse R559m. If that is achieved, it will be the first financial year that disbursements are likely to rise above those of 2015/2016.

To help with collections, an executive has recently been appointed to oversee post-loan support and loan restructuring.

Sefa is also looking to partner with industry associations to write more direct lending loans where clients can be supported by technical partners, which could help cushion the risk.

The agency has already tested this approach with the Tourism Enterprise Partnership and is also looking at offering it to informal traders at fresh-food markets.

Makhuvha stresses that the expansion of the initiative does not mean the agency will do away with retail finance intermediaries.

The agency has agreements with five such organisations at present, down from 15 at one time under Khula. But MPs have in recent years questioned the need for intermediaries, arguing that they raise the cost of finance for small firms.

Makhuvha says Sefa needs strategic partners to drive lending, as long as these don’t compete with its direct lending product but rather offer niche financing.

However, Retmil Financial Services MD Retha Notley alleges that Sefa is trying to kill off the Bloemfontein-based intermediary. The agency, she says, cancelled a long-running revolving credit agreement in 2012 when she refused to give a 26% stake of her company to a BEE partner.

Makhuvha says he does not wish to comment on the case, but Notley says that in about July last year the agency began legal proceedings demanding the company repay the R42m in loan capital it owes the agency. Notley says a court date must still be set.

The trouble started, she says, when Sefa staff at its Bloemfontein office wrote to many of Retmil’s clients saying the agency could offer cheaper finance. Notley says Retmil adds a margin of 5% on the capital it gets from Sefa to on-lend.

She says some of the business owners being financed by Sefa’s office in Bloemfontein have approached her company for funding in the past, but that she wouldn’t trust them to pay even “a R1,000 credit-card debt”.

The state is under pressure, with a huge demand from business owners for finance. This is indicated by the fact that just 30% of applications to Sefa for direct finance are approved. MPs want Sefa to ramp up lending, but in a sustainable way.

The agency relies on loans from the IDC and allocations from national treasury. To meet its target of disbursing just under R6.5bn between 2016 and 2020 and offering discounted finance, the agency will rely on R921m in loans from the IDC and further allocations from the fiscus.

But funding will become tighter. The agency’s revenue and grants are set to decrease by 13% over the next three years, after its allocation from the fiscus declined by about R200m. It must reduce impairments to 17% if it is to meet its target of breaking even by 2020/2021.

Makhuvha admits that resuscitating its credit guarantee schemes — where the state underwrites loans that banks make to small firms — could help the state to scale up lending sustainably.

Most of the nearly 300,000 clients Sefa aims to fund between 2016 and 2020 are micro-firms, which will help create 497,500 jobs. Credit guarantees could help expand lending to more of the type of small firms that can create jobs.

Sefa inherited the guarantee lending programme from Khula. But under Sefa the scheme has just about shut down; just R12m in loans was guaranteed in 2015/2016. Sefa wants to lend R1.3bn in guarantees over the next five years.

Last month Absa, FNB and Standard Bank told the Financial Mail they had not issued any Sefa guarantees last year. Banks are reluctant to use the scheme, mainly because, if a client should default on a guarantee-backed loan, the bank must get a court judgment, which can take months to obtain, before approaching Sefa to seek indemnity.

Makhuvha says the agency is trying to revive the scheme by getting banks to sign portfolio agreements.

Kgomo approached Sefa after being turned down by her bank. In June 2014 the agency’s Bloemfontein office gave her a R493,000 direct loan to finance a bakkie and a baling machine to compress waste.

But her revenue was constrained while she waited four months for the baling machine to be delivered. During this time she had to begin servicing the loan. Having fallen behind some months in payments, she says she is looking to increase the term over which her direct loan must be paid from four to five years. But with Sefa’s focus on collections she and her eight employees might not find it easy.